Correlation Between Small Cap and Nasdaq 100

Can any of the company-specific risk be diversified away by investing in both Small Cap and Nasdaq 100 at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining Small Cap and Nasdaq 100 into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between Small Cap Stock and Nasdaq 100 Index Fund, you can compare the effects of market volatilities on Small Cap and Nasdaq 100 and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in Small Cap with a short position of Nasdaq 100. Check out your portfolio center. Please also check ongoing floating volatility patterns of Small Cap and Nasdaq 100.

Diversification Opportunities for Small Cap and Nasdaq 100

0.56

Correlation Coefficient

Small Cap  Nasdaq 100

Very weak diversification

The 3 months correlation between Small and Nasdaq is 0.56. Overlapping area represents the amount of risk that can be diversified away by holding Small Cap Stock and Nasdaq 100 Index Fund in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Nasdaq 100 Index and Small Cap is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on Small Cap Stock are associated (or correlated) with Nasdaq 100. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Nasdaq 100 Index has no effect on the direction of Small Cap i.e., Small Cap and Nasdaq 100 go up and down completely randomly.

Pair Corralation between Small Cap and Nasdaq 100

Assuming the 90 days horizon Small Cap is expected to generate 3.24 times less return on investment than Nasdaq 100. In addition to that, Small Cap is 1.11 times more volatile than Nasdaq 100 Index Fund. It trades about 0.03 of its total potential returns per unit of risk. Nasdaq 100 Index Fund is currently generating about 0.12 per unit of volatility. If you would invest  2,757  in Nasdaq 100 Index Fund on September 24, 2024 and sell it today you would earn a total of  2,481  from holding Nasdaq 100 Index Fund or generate 89.99% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Weak
Accuracy	100.0%
Values	Daily Returns

Small Cap Stock  vs.  Nasdaq 100 Index Fund

Small Cap Stock

Risk-Adjusted Performance

0 of 100

Very Weak

Over the last 90 days Small Cap Stock has generated negative risk-adjusted returns adding no value to fund investors. In spite of latest weak performance, the Fund's fundamental indicators remain strong and the current disturbance on Wall Street may also be a sign of long term gains for the fund investors.

Nasdaq 100 Index

Risk-Adjusted Performance

5 of 100

Modest

Compared to the overall equity markets, risk-adjusted returns on investments in Nasdaq 100 Index Fund are ranked lower than 5 (%) of all funds and portfolios of funds over the last 90 days. In spite of fairly strong basic indicators, Nasdaq 100 is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with Small Cap and Nasdaq 100

The main advantage of trading using opposite Small Cap and Nasdaq 100 positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if Small Cap position performs unexpectedly, Nasdaq 100 can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Nasdaq 100 will offset losses from the drop in Nasdaq 100's long position.

The idea behind Small Cap Stock and Nasdaq 100 Index Fund pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

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Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Portfolio Optimization module to compute new portfolio that will generate highest expected return given your specified tolerance for risk.